Securities Fraud

Ex-Goldman Sachs Broker’s Request for SEC Help in Obtaining Documents from Germany Denied by District Court

Published on: February 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York says it will not direct the Securities and Exchange Commission to contact German authorities on behalf ex-Goldman Sachs & Co. (GS) executive Fabrice Tourre, who is seeking to obtain certain documents related to the securities fraud case against him. Per Magistrate Judge Michael Dolinger’s ruling, a discovery request based on Federal Rule of Civil Procedure 34(a) doesn’t “extend” to having a
“government agency make requests to a foreign government under the terms of” a memorandum of understanding between both parties. Dolinger notes that while MOU between the SEC and its German equivalent allows both regulators to help each other in the enforcement of their respective securities laws, “there is no indication” that the MOU is supposed to offer a right or a benefit to a private party, such as allowing a securities fraud litigant to obtain discovery in Germany.

The SEC charged Goldman Sachs and Tourre over alleged misstatements and omissions related to collateralized debt obligations called Abacus 2007-AC1, a derivative product linked to subprime mortgages. The broker-dealer settled its securities case for $550 million. Meantime, Tourre, who is accused of giving Goldman Sachs “substantial assistance” in its alleged efforts to mislead investors, is seeking to have the SEC case against him dismissed. He is pointing to Morrison v. National Australia Bank Ltd., a US Supreme Court decision that was issued two months after the SEC filed charges against him.

This week, his lawyers argued that the SEC was attempting to circumvent the Supreme Court ruling, which limits the reach of civil claims over acts that occurred outside the country. The transactions involving Tourre that are under dispute took place abroad.

Goldman’s Tourre Shouldn’t Face SEC Lawsuit, His Lawyers Say, Bloomberg Businessweek, February 15, 2011

The SEC Complaint (PDF)

TD Ameritrade Inc. Settles SEC Securities Fraud Charges Over Reserve Yield Plus Fund Shares for $10M

Published on: February 14, 2011 | by Shepherd Smith Edwards & Kantas, LLP

TD Ameritrade Inc. (AMTD) has settled Securities and Exchange Commission charges that it failed to reasonably supervise its representatives, some who sold shares of the Reserve Yield Plus Fund to clients. As part of the settlement, TD Ameritrade will pay $10 million to eligible customers who are still fund shareholders.

According to the SEC, TD Ameritrade representatives offered and sold Reserve Yield Plus Fund shares to customers before September 16, 2008. The SEC contends that the representatives “mischaracterized” the fund as a money market fund, making it seem as if the fund had guaranteed liquidity while allegedly failing to discloses the risks involved with this type of investment. In September 2008, the fund “broke the buck” when its assets’ value fell lower than the level required to cover each dollar that had been invested in the fund.

The SEC also claims that TD Ameritrade lacked an adequate supervisory system or policies to stop its representatives’ misconduct that led to investors’ losses. Clients eligible to receive money from the settlement should get receive 1.2 cents per share.

The SEC says that it is essential that customers are given adequate information about investment instruments and that broker-dealers must properly train and supervise their representatives to give clients this important information. The SEC said that thousands of TD Ameritrade customers still hold most of the Yield Plus Funds shares. They got approximately 95% of its original investments after the fund liquidated its assets.

By agreeing to settle, the TD Ameritrade Inc. is not denying or admitting to the misconduct.

Related Web Resources:
SEC announces $10M settlement with TD Ameritrade, AP/Yahoo, February 3, 2011
SEC Charges TD Ameritrade for Failing to Supervise Its Representatives Who Sold Shares of the Reserve Yield Plus Fund, SEC, February 3, 2011
Securities Fraud Attorneys

Related Blog Posts on SEC Settlements:
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011 Continue Reading ›

AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M

Published on: February 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

AXA Rosenberg Investment Management LLC (ARIM), AXA Rosenberg Group LLC (ARG), and Barr Rosenberg Research Center LLC (BRRC) have agreed to pay over $240 million to settle administrative securities fraud charges that they hid an important error in the computer code of the quantitative investment model used for managing client assets. The Securities and Exchange Commission says the error resulted in investor losses worth $217 million. As part of the settlement, the three Axa Rosenberg entities will repay the investors who sustained financial losses, as well as a $25 million penalty.

The SEC says that the institutional money manager’s concealment of “material error in its computer code” from investors was a violation of federal securities laws. The commission also claims that the three entities made material misrepresentations, such as failing to disclose the error or its effect and did not properly represent “the model’s ability to control risks.”

Per the charges, the error, which was discovered by ARG and BRRC senior managers in June 2009, disabled a key risk-management component. Instead of fixing the problem right away, senior management told others not to reveal the error, which they did not remedy at the time.

The SEC says that quantitative investment managers have been known to “isolate their complex computer models from the firm’s compliance and risk management function” in an attempt to protect trade secrets.” The SEC also claims that BRRC failed to implement and adopt compliance procedures and policies to make sure the model would work as intended. Although the error was eventually remedied, ARG’s Global CEO was not notified of it until five months after its discovery.

As of last December, Axa Rosenberg Group LLC said that as “the specialist active global equity investment management firm” managed over $31 billion in assets. ARG is the holding company of investment advisers ARIM, which used the investment model to manage client portfolios, and BRRC, which developed the quantitative investment model’s code.

Related Web Resources:
SEC Charges AXA Rosenberg Entities for Concealing Error in Quantitative Investment Model, SEC, February 3, 2011
Read the corrected SEC order (PDF)

More Blogs on SEC Enforcement:
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Broker Settles SEC Charges He Defrauded Elderly Nuns, Stockbroker Fraud Blog, January 13, 2011 Continue Reading ›

CalPERS Files Securities Fraud Lawsuit Against Lehman Brothers

Published on: February 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The California Public Employees’ Retirement System is suing Lehman Brothers Holdings Inc., its ex-executives, and a number of bond underwriters for fraud and of making materially false statements about mortgage-backed securities losses. CalPERS, a $229 billion public pension fund, owned about $700 million Lehman bonds and 3.9 million shares of Lehman bonds when Lehman filed for bankruptcy in September 2008. Because of the economic crisis, CalPERS funds lost $100 billion in value from September 2008 and March 2009.

In its securities fraud complaint, CalPERS accused Lehman of “dramatically” borrowing to fund its real estate investments from 2004 to 2007—high-risk activity that investors were not told about. Other defendants include ex-Lehman Chief Executive Richard S. Fuld Jr., ex-Lehman Chief Financial Officers Erin Callan and Christopher O’Meara, 9 Lehman directors, and 33 others firms, including Wells Fargo Securities, Citigroup Global Markets Inc., and Mellon Financial Markets. The defendants allegedly failed to disclose not just Lehman’s exposure to Alt-A lending and subprime, but also its mortgage-related assets’ true value.

This securities complaint is CalPERS second action against members of Wall Street that sold mortgage-backed securities. In July 2009, CAlPERS sued Standard & Poor’s, Moody’s Investors Services Inc., and Fitch Inc. The complaint accused the financial rating companies of giving top grades to bonds that ended up sustaining huge financial losses when the subprime mortgage securities market collapsed.

Also, CalPERS has a shareholder lawsuit against Bank of America Corp. (BAC) over its Merrill Lynch acquisition. The pension fund also has a case against BofA’s Countrywide Financial.

Related Web Resources:

CalPERS suit accuses Lehman Bros. of fraud, Los Angeles Times, February 9, 2011

CalPERS

Financial Fraud Verdict: Jury Orders BDO Seidman to Pay Aviation Pioneer George Batchelor’s Estate and Foundation $91M

Published on: February 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Nine years after the death of aviation pioneer and philanthropist George Batchelor, a circuit court verdict has issued a jury awarding his estate and foundation $91 million in its financial fraud case against BDO Seidman. The lawsuit, which was filed in 2002, accused BDO Seidman of covering up inaccurate financial statements when Grand Court Lifestyles, a company that Batchelor had invested tens of millions of dollars in, was audited.

Of the $91 million verdict, $36 million is compensatory damages, $55 million is punitive damages. All of the award will go to the Foundation, which means that the dozens of organizations that it supports may get more funds. Prior to his death, Batchelor, who founded Batch Air and Arrow Air, gave about $100 million to causes related animals, kids, medical facilities, and the environment.

The law firm that represents Batchelor’s estate says that until the end, BDO “denied it had a public duty” and “was willing to look the other way” for Grand Court, which let go of another accounting firm that wanted to know how the manager/owner of “senior” communities valued certain properties. Deloitte & Touche, which was the original accounting firm for Grand Court, has settled its securities case with the Batchelor Foundation.

Financial fraud and its concealment are against the law. If you are a victim of financial fraud you may have grounds for a civil case.

Related Web Resources:

Jury Rules Against BDO, The Wall Street Journal, February 1, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers

Published on: January 31, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the members of the Securities and Exchange Commission’s Division of Investment Management recommended that Congress either set up at least one self-regulatory organization that oversees investment advisers, impose “user fees” to fund examinations by the Office of Compliance Inspections and Examinations, or make investment adviser oversight the Financial Industry Regulatory Authority’s responsibility. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 914, the SEC is supposed to assess itself and make recommendations for improvement.

Per the SEC’s report, there is at this time inadequate resources for examining the over 11,000 registered investment advisers-a number that will likely go down by 3,350 in July when Dodd Frank’s Section 410 goes into effect and advisers with assets under management valued at $100 million or less will have to register with the state where their main place of business is located. That said, the growth in the industry is such that by fiscal year 2021 there may be up to 13,908 registered advisors with a collective worth greater than $70 trillion.

However, while industry groups will likely endorse a more influential FINRA or a new SRO, investment advisers believe that self-regulation’s rules-based nature is not compatible with their business model and government oversight and regulation would be better for them. FINRA believes that an SRO will be able to “augment” government oversight. In the past, FINRA has expressed willingness to take on this role.

Yet Another Securities Case Against a Financial Firm Alleged to Have Aided Enron in its Scams is Dismissed Without Liability in Texas!

Published on: January 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Many financial firms settled claims filed by those defrauded in the Enron debacle. Meanwhile, many more Enron securities fraud cases have been dismissed by a court system riddled with special interest influence. No financial firm has been held liable and certain individuals at those firms were held liable only to have their convictions reversed. Thus, perhaps the largest, most notorious and most brazen fraud ever perpetuated by a publicly traded firm against its own shareholders will end not with a bang, but with a whimper.

Earlier this month, securities charges against Deutsche Bank Securities Inc. were dropped in the U.S. District Court for the Southern District of Texas. The financial firm was accused of fraudulently getting two entities to buy beneficial ownership interests in Osprey Trust. The special purpose entity was allegedly secured using worthless investments bought from Enron. The plaintiffs contend that the assets were “dumped” into Osprey as part of a bigger scheme to defraud investors and manipulate Enron’s financial statements.

The court said that because the plaintiffs did not specify any affirmative misrepresentation made by a Deutsche Bank official, they did not and “cannot plead with particularity either scienter on the part of a Deutsche Bank speaker or writer or reasonable reliance … on a claimed misrepresentation.” The court also said that the financial firm’s stated motive for alleged defraud, which allegedly was for tax benefits and high fees, is a common incentive among financial firms and their officers and therefore is not enough for stating “a claim for fraud” under the laws of Texas and New York.

Related Web Resources:
Newby, et al v. Enron Corporation, et al., U.S. District Court for the Southern District of Texas
The Fall of Enron, Chron.com Continue Reading ›

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah

Published on: January 22, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the US Securities and Exchange Commission, while working at Aquila Investment Management LLC, ex-portfolio managers Thomas Albright and Kimball Young allegedly defrauded the Tax Free Fund for Utah (TFFU)-a mutual fund that was heavily invested in municipal bonds. Now, the two men have settled the securities fraud charges for over $700,000. However, by agreeing to settle, Young and Albright are not admitting to or denying the allegations.

The SEC claims that without notifying the TFFU’s board of trustees or Aquila management, the two men started making municipal bond issuers pay “credit monitoring fees” on specific private placement and non-rated bond offerings. The fees, which were as high as 1% of each bond’s par value, were charged to supposedly compensate Albright and Young for additional, ongoing work that they say was required because the bonds were unrated. The SEC says that credit monitoring was actually part of the two men’s built-in job responsibilities and that although deal documents made it appears as if the fees (totaling $520,626 from 2003 to April 2009) had to be paid and would go to TFFU, they actually end up in a company that Young controlled and that Albright owned equal shares in.

The SEC says that after management at Aquila found out in 2009 that Young and Albright were charging these unnecessary fees, the financial firm suspended the two men right away and reported them to the agency. The agency says the two men violated their basic responsibilities as investment advisers of mutual funds when they failed to act in the fund’s best interests.

Related Web Resources:
The SEC Order Against Young (PDF)

The SEC Order Against Albright (PDF)

Tax Free Fund for Utah

Municipal Bonds, Stockbroker Fraud Blog Continue Reading ›

CFTC Files Charges in Alleged California Ponzi Scam Involving the Fraudulent Solicitation of $14 million in Commodity Futures

Published on: January 18, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Commodity Futures Trading Commission is charging Increase Investments Inc., Spirit Investments, and Scott Bottolfson with securities fraud. The CFTC contends that the defendants solicited about $14 million from 30 individuals for investments in two commodity trading pools that traded options on commodity futures and commodity futures contracts. Increase and Spirit allegedly ran the pools. The commission is seeking restitution for the investment fraud victims, fines, the return of ill-gotten gains, trading and registration bans, and permanent injunctions against future violations of federal commodities laws.

The CFTC contends that from 2002 through August 2010, Bottolfson made false and misleading statements to draw in prospective investors. He is accused of promising a 20% fixed-rate return and making it appear as if the commodity futures investments were not only guaranteed, but also that they protected, risk-free, and profitable.

Investors went on to sustain about $845,000 in trading losses. About $2.97 million had been placed in the commodity pool trading accounts. The CFTC is accusing Bottolfson of allegedly misappropriating about $11 million of investors’ money to pay pool participants their “profits,” as well as cover some of his personal expenses.

Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors

Published on: January 17, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Charles Schwab Corp. has agreed to settle for $119 million Securities and Exchange Commission securities fraud charges that it misled investors about the risks involved in its Schwab YieldPlus Fund. By agreeing to settle, Schwab is not denying or admitting wrongdoing.

In 2008, the YieldPlus Fund dropped to $1.8 billion in assets after a peak of $13.5 billion in 2007. The decline happened because, rather than sticking with its stated policy, the fund invested over 25% of assets in private-issuer mortgage-backed securities. According to SEC Division of Enforcement Associate Director Antonia Chion, Schwab promoted the fund as a cash alternative that was supposed to be just slightly riskier than a money market fund even though at one point half the assets were in securities with credit quality and maturity that were very different from the type of investments that money market funds make.

Per the fund’s 1999 registration statement, YieldPlus was to only invest no more than 25% of its assets in one industry. The SEC contends that without obtaining shareholder approval, in 2006 Schwab changed the statement to say that it no longer thought of mortgage-backed securities as an industry. Last year, Schwab agreed to pay $200 million to settle with plaintiffs over the Schwab YieldPlus Fund.

The SEC has also filed a securities fraud complaint against Schwab executives Randall Merk and Kimon Daifotis over the offering, managing, and selling of the Schwab fund. Both men say that they will contest the allegations.

Related Web Resources:
Schwab to Pay $119 Million to Settle SEC Probe Over Misleading Statements, Bloomberg, January 11, 2011
Schwab Settles SEC Charges Over Allegations it Misled YieldPlus Fund Investors for $119M, ThirdAge, January 12, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
Read the SEC Complaint against Merk and Daifotis (PDF) Continue Reading ›